Continuing the risk off shift from last week, many of the world’s major equity markets began this week under significant selling pressure, with a handful of key events stoking investor concerns over the near-term outlook within financial markets. Financial distress at China’s Evergrande Group, speculation ahead of major central bank monetary policy meetings, and risk asset valuations all resulted in weakness in short term sentiment at the beginning of the week. The CNN Fear & Greed Index, which was referenced in last week’s commentary, transitioned from ‘fear’ to ‘extreme fear’ during the weekly time frame, further highlighting the shift in investor sentiment which brought about the volatility seen in Monday’s trading session. Financial markets initially experienced sharp falls at the beginning of the week, however we have watched investor sentiment improve as the week has progressed, offsetting some of the negative movements across the market. Despite economic fundamentals showing signs of deceleration as growth begins to normalise, the fundamental outlook remains strong and sentiment remains positive, with markets bouncing back strongly in recent trading sessions.
US, Asia, and some European equity markets continued their downward trend from last week, with Evergrande news flows and the Federal Reserve’s policy update encouraging further profit-taking at attractive valuation levels. After being the only major region analysed to perform strongly last week, Japanese equities fell sharply on Tuesday as Evergrande news flows impacted Japanese firms that are considered to be vulnerable to a further slowdown in China’s property development, while Chinese equities continued to underperform. Within the US, debt ceiling fears, Federal Reserve uncertainty, and the possibility for future tax hikes all contributed to the weekly index declines. Despite this, Fed Chair Jerome Powell’s signal that the central bank will likely scale back their asset purchases later this year worked to improve investor sentiment within markets, and US futures suggest equities could erase more of their weekly losses on Thursday, boosting the short-term outlook for US risk assets.
From the indices analysed, the only regions to gain over the week were the UK and France. Having dropped considerably last week, UK equities were the strongest regional performers over the week, despite the potential arrival of rising energy costs in the winter and the conclusion of the UK’s furlough programme arriving in the short-term. The increase in UK equities appears to be down to a combination of factors, such as improving investor sentiment, UK government borrowing coming in below forecasts, and elevated M&A activity involving UK firms. That being said, we are expecting to see greater volatility in UK assets following the Bank of England’s latest press conference.
All non-equity sectors analysed fell over the week, with index-linked gilts alternating from the strongest performer last week to being the weakest this week. There appears to be limited room for bond yields to move lower given the healthy outlook for global economies. Given the expected tapering of asset purchases by major central banks over the next 12 months, bond prices could fall and yields could rise further as monetary policy support is gradually withdrawn.
Against the backdrop of investor uncertainty, the OBI portfolios followed equity and non-equity markets lower this week, albeit some losses have been erased due to the improvement in performance since Monday 20th. The OBI 3 to 5 portfolios fared best in the period due to their higher weighting to non-equity assets, while the higher equity weightings created a drag on OBI 6 to 8 performance.
As we have seen this week, risk assets are likely to face headwinds over the coming weeks on the back of policy uncertainty alongside elevated geopolitical risks. Despite this, as data flows continue to feed through and clarity improves, risk assets could continue to bounce back as we have seen over recent trading sessions. At this stage, our fundamental outlook remains unchanged, and the macroeconomic backdrop remains supportive for the remainder of 2021 into 2022.
Past performance cannot be used as a guide to future performance and the value of your investment will fall as well as rise in value. You may not get back all of your investment and the final value of your investment will depend on the performance of your portfolio. The actual performance of an individual client’s portfolio may differ due to different funds being used and being restricted in relation to certain asset allocations. Performance figures quoted include fund manager charges but exclude adviser, discretionary, custodian and switch charges and trading spreads. Unless stated, income is reinvested into the portfolio. The information contained in in this document is for information purposes only. It does not constitute advice or a recommendation or an offer or solicitation for investment.
Key Events We Are Watching This Week:
- Friday 24th: Japanese Inflation Rate.
- Wednesday 29th: EU Consumer Confidence and Economic Sentiment.
This Day in History
On this day in 1846, astronomer Johann Gottfried Galle became the first person ever to observe the planet Neptune, the existence of which had been mathematically predicted by Urbain-Jean-Joseph Le Verrier and John Couch Adams.
Thank you for reading, have a great week!
Jason, Gina & Ben
